Swiss Inflation Rate Unexpectedly Rises in Relief for SNB

(Bloomberg) — Swiss consumer prices unexpectedly rose in June, offering respite to the central bank after a dip below zero forced it to end a period of positive borrowing costs. 

The inflation rate increased to 0.1% from a year ago, following a 0.1% decline the previous month, according to the country’s statistics office. Economists surveyed by Bloomberg predicted another negative reading.  

The outcome was anticipated by just one economist — Bank J Safra Sarasin Chief Economist Karsten Junius — and brings inflation to a three-month high. That will be a relief for policymakers whose alarm at the extent of inflows into the franc prompted yet another interest-rate cut in June. 

“We can now say that May’s negative reading was a one-time lapse,” said Junius, adding that while Swiss inflation remains slow, deflation isn’t on the horizon. 

The data “validate the SNB’s hesitancy to go negative and also makes another rate cut in September not very likely,” he said.

Policymakers have expressed some qualms on going below zero, warning of the side effects on savers, bankers and pension funds. Similarly, economists are torn over what’s next, with only a slim majority in a Bloomberg survey after June’s cut predicting rates will remain unchanged through the end of next year.

What Bloomberg Economics Says…

“The latest inflation release does not invalidate the weak price dynamic of the Swiss economy — we think downside risks are looming ahead and will likely force the SNB to cut further later this year.”

—Jean Dalbard, economist. For full react, click here

Mainly responsible for the weakness in inflation is the strong franc, which touched the highest levels in a decade against the dollar over the last quarter, driven by inflows from investors alarmed at dramatic policy shifts in the US. 

That puts the option of foreign-exchange interventions on the table as an alternative to further rate cuts. Policymakers have stressed they’re willing to consider them, but at least in the first quarter — the last for which data are available — they’ve refrained from using the tool.

The International Monetary Fund urged President Martin Schlegel and his peers to think twice before intervening, considering the SNB’s already bloated balance sheet. It also urged restraint on rates, saying that while the latest cut was justified amid signs of a weakening labor market and heightened uncertainty, temporarily negative inflation shouldn’t warrant another cut.

The fund forecasts consumer-price growth of 0.1% this year and 0.6% next. That’s similar to the SNB’s view. Core inflation is expected to stay above zero and within the central bank’s 0-2% price stability range this year.

In June, inflation was driven by holiday-related costs, while prices for gasoline, air transport and stone fruits fell, the Swiss statistics agency said Thursday. A gauge excluding volatile costs such as fresh and seasonal items and energy rose 0.6%.

Safra’s Junius also pointed out that the current heat wave in Europe had Swiss food prices rise 3% in June, which is more than in previous years.

Consumer-price growth in the surrounding euro area remains significantly stronger than in Switzerland and came in at 2% in June, the level the European Central Bank aims to deliver in the medium term. Based on the European Union’s harmonized measure, Swiss prices rose 0.2% in the period.

–With assistance from Joel Rinneby, Kristian Siedenburg and Harumi Ichikura.

(Updates with economist comment starting in fourth paragraph.)

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